Home Loans for Business Owners: Everything You Need to Know

As a business owner, you have unique financing needs when it comes to buying or refinancing a home. Traditional bank loans may not fully meet the needs of entrepreneurs and small business owners when qualifying for a mortgage.

In this comprehensive guide we’ll explore the home loan options tailored to business owners, including

• How business income is calculated for loan qualification
• Using personal assets to qualify
• Using home equity for business funding
• LLC financing challenges
• Alternative lenders to consider
• Tips for getting approved as a business owner

Whether you’re self-employed, have an established business, or just launched a startup, understanding the nuances of getting a home loan as a business owner is key to your success.

How Lenders Calculate Business Income

Lenders have specific requirements for documenting business income:

• 2 years of tax returns – You’ll need to provide 2 years of personal and business tax returns. Lenders average your net business income over this period.

• Profit and loss statements – If you don’t have 2 years of tax returns, or your income changed recently, provide up to 12 months of profit and loss statements.

• 1099s – If you’re an independent contractor, all 1099 forms prove your earnings.

• Bank statements – Personal and business bank statements show income and expenses.

Providing complete documentation allows lenders to fully assess your average monthly business income and income stability over time.

Using Personal Assets to Qualify

Many lenders allow you to use your personal assets to help qualify for a mortgage as a business owner. Sources include:

• 401(k)s, IRAs, or retirement accounts
• Investment accounts like stocks and bonds
• Cash savings accounts
• Proceeds from selling other real estate

Lenders may require you to keep a portion of these assets in your account post-closing as reserves. But tapping personal assets provides more options to offset the inconsistent or lower income common with new businesses.

Accessing Home Equity for Business Funding

If you have sufficient home equity, consider accessing it to raise capital for your business:

• Home equity loan – Get a lump sum you can use for any business purpose. Rates are often lower than alternatives.

• HELOC – Gives you access to a revolving credit line to withdraw funds as needed. You only repay what you use.

• Cash-out refinance – Refinance your mortgage for more than you owe and take the difference in cash.

Using home equity is cheaper than high-interest credit cards or personal loans. Just be sure you can manage the additional monthly payment obligation.

Challenges of LLC Financing

As an LLC owner, you may want to buy investment property under your business entity. But most lenders shy away from lending to LLCs, making financing difficult. Lenders know LLCs provide liability protection that makes debt recovery harder. Expect to face these hurdles when financing with an LLC:

• Limited mortgage loan options due to liability concerns
• Higher interest rates on investment property loans
• Need to qualify based on personal income and credit
• Ineligibility for owner-occupied, FHA, and conforming loans

Consider buying the property in your personal name first, then transferring it later. But watch out for triggers on your existing mortgage that could force immediate repayment.

Alternative Lender Options

If you don’t qualify with a conventional lender, consider these alternative mortgage lenders:

• Non-QM lenders – May offer more flexible qualification using assets or business income. But interest rates are higher.

• Portfolio lenders – Keep loans in their own portfolio instead of selling to Fannie Mae or Freddie Mac. This provides more underwriting flexibility.

• Credit unions – Member-owned not-for-profits that focus on community lending. May look at context beyond formulas.

• Online lenders – Can use technology to assess creditworthiness in new ways. Provide faster approvals.

Be sure to compare across multiple lenders to find the best rates and programs to fit your unique financial situation as a business owner.

Tips for Getting Approved

Follow these tips to get approved for a home loan if you’re self-employed or a business owner:

• Maintain a high credit score – Scores above 740 get the best mortgage rates and more easily offset income challenges.

• Lower your debt-to-income ratio – Pay down debts and avoid new ones while applying for a loan.

• Have substantial cash reserves – Reserves make lenders more comfortable with inconsistent self-employment income.

• Get all your documentation in order – Thoroughly document your income and assets. Leave no stone unturned.

• Consider a cosigner – Adding a cosigner with higher, steadier W-2 income can help you qualify.

• Make a large down payment – Putting 20% or more down signals you’re financially committed to the home purchase.

• Talk to an independent mortgage broker – They have deep expertise and can help you find the right loan program.

With the right lender and loan program, financing a home as an entrepreneur or business owner is very achievable. Align yourself with experts who understand the uniqueness of your financial situation. They can guide you through the mortgage process and help you successfully get approved.

The Bottom Line

Buying or refinancing a home as a business owner requires some special considerations when qualifying for a mortgage. Tapping personal assets, using home equity strategically, finding alternative lenders, and following tips to strengthen your application are all key to your success. With the right lender and loan program, you can achieve affordable financing that allows you to buy or keep the home you need to grow your business.